Don’t Count On Cable Operators To Cozy Up To Netflix: Analyst

The Netflix fans on Wall Street who’ve helped its stock price rise 500% over the last 12 months to hover around its all-time highs have two fantasies about the streaming service. Some imagine that it will grow into a popular haven for people who want to cut the cord with cable or satellite’s TV services, attracting upward of 50M subscribers — up from about 29M now. Others say that Netflix can make peace with distributors, leading them to offer it as another premium channel much like HBO. Possible? Perhaps. But Bernstein Research analyst Carlos Kirjner doesn’t buy either scenario. In a bracing report today he warns that Netflix is overpriced unless you believe that “we are indeed witnessing the beginning of a fundamental change in the TV business, which would be very detrimental to the [cable operators], and that they are not going to exercise their tremendous and in our view increasing market power to prevent that from happening.”

Cable operators don’t need Netflix: They already serve about two-thirds of wired broadband customers without it. And they can knock Netflix on its ass simply by making Internet customers pay for the number of bits they use each month — effectively raising prices for those who like to stream video. “Netflix bulls often dismiss this possibility by hoping that the FCC or perhaps the DoJ would intervene,” Kirjner says. But he calls that “highly unlikely” warning that “investment theses that depend on government agencies or legislative bodies to actually do something are bad theses (because it is just so hard to get anything done in government).” Meanwhile wireless broadband can’t help: The technology “will not support Netflix streaming at scale (certainly not to TV sets).”

Can’t cable and Netflix become partners? Investors became enthusiastic about the possibility last month when the UK’s Virgin Media agreed to put Netflix side-by-side with its cable channels by offering an app to the service for customers who use its set-top boxes from TiVo. But most operators will want to be paid to carry and market Netflix — especially if they believe its subscribers might shave outlays for other pay TV services — Kirjner says. That could come to as much as $5 per subscriber per month. If Netflix agreed to forego that much “its [profit] margins would crash” meaning that its shares “would be hugely over valued at their current price.”

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The bottom line: It’s possible that Netflix could benefit from developments that “have extremely low probabilities to the point of being almost absurd.” And it’s possible that cable companies won’t “take advantage of their market power to prevent Netflix and [streaming video providers] in general to transform the TV business. We just think investors should not count on either.”

9 Comments

marklondon • on Oct 4, 2013 1:34 pm

“we are indeed witnessing the beginning of a fundamental change in the TV business, which would be very detrimental to the [cable operators], and that they are not going to exercise their tremendous and in our view increasing market power to prevent that from happening.”

That’s exactly what’s happening. That’s exactly what we’re witnessing. Cable Operators = landline phones. Over 150M American homes still have landlines, but that’s not an attractive market is it?

And don’t try the ‘but cable controls the internet pipe” trope: within 5 years the over air/non cable co fiber will be fast/wide enough for streaming. They would have to acquire all the telcos and Google to flank it. Good luck with that.

Netflix is the Amazon of the streaming content world. It’s a steady, non-stop encroachment, where Time/Warner/Cox/Comcast is Best Buy in this scenario. If cable is to survive it will need to be 1000% more customer friendly than it is now.
There will be a small (hot) war at some point – Warner & others pulling content, cutting prices, then boom, the war will be over.

UHD will be another death knell – good luck getting that down your current pipes.

Cable won’t disappear – but I’d get out of those stocks now.

Weez • on Oct 4, 2013 1:34 pm

You’re forgetting one thing. All of that licensed content that Netflix/Amazon Prime/Hulu/etc. users enjoy watching when and where they want… It’s licensed. Netflix doesn’t own it, and could lose it at any time. Let’s say that Disney (or any other content provider) decides to pull all of its content from these services in order to start their own. Then what?

Point is, there are still over 100 million cable subscribers in the United States.

cas127 • on Oct 4, 2013 1:34 pm

Agreed.

As with the article itself, the key to the whole exercise is to look at the “choke-points” in the marketplace –

1) Distribution to the home – There are maybe 6 to 8 large incumbent distributors (Comcast/TW Cable/Charter/Cox/Direct TV/Dish/AT&T/Verizon) and the infrastructure outlay for new entrants is pretty damn high.

(Side note – Physical on-the-ground rights-of-way may be a fortune but are new satellites really all that expensive?)

2) The content library owners – Six to eight that matter (hmm…6 to 8, again) – TW/Disney/Paramount/Fox/Sony/Universal/Weinstein (sorta)/Lionsgate (sorta) – These SOBs own *everything* (and sit on 95% of it – knowing they would *never* enable new competitors for ad dollars or cable licensing fees).

Perhaps(~) not as big/expensive a hurdle as distribution infrastructure – in truth, decent movies can be made for less than $10 million and TV episodes for less than $1 million – it is only the current oligopoly that enables/encourages the current over-expenditures. Nowhere near as cheap as pulling something out of the vault at one of the big 6 (but doable).

These choke-points (mostly entry cost related) are what keep the Big 6/8 rich and powerful. These incumbents will *never* allow their assets (almost regardless of money offered) to undermine their competitive access to ad dollars/licensing fees.

Just isn’t going to happen.

Voluntarily.

But technology and low interest rates are gradually undermining them.

(Now if only a little more cleverness could be applied…for example, there *are* other content libraries in the world…)

Patrick • on Oct 4, 2013 1:34 pm

But amazon (which owes its profits to sidestepping state sales tax) was still able to deliver the same money to the product. Publishers sold books at a set price. Be it Amazon or B&N. Ditto with everything else Amazon sells.

Netflix can’t do that with TV. Without the commercials, producers can’t recoup the same amt of money from Netflix as from Cable (and soon, Google).

You mentioned Time Warner. What happens to Netflix when TW, Viacom, Charter, and Newscorp all withhold ALLL their content, effectively reducing Netflix to ancient shows?

When the tech hits the level you predicted, the groups I just mentioned will all offer streaming on their own.

RodanPIMC • on Oct 4, 2013 1:34 pm

This article shows a lack of understanding of the true dynamics of the Netflix relationship. The service is choking broadband capacity across the country and Netflix, unlike Google and other major content sources, isn’t willing to work with providers to make that burden easier on the networks. The cable companies won’t give Netflix a ‘channel’ until they come to the table on capacity issues.

Tvaddic • on Oct 4, 2013 1:34 pm

People act like Netflix would be the only ones to get hurt from customers having to pays for the internet bit by bit. Google, Apple, Microsoft, Facebook, Yahoo, Amazon and etc. could “figure something out” if all the broadband companies wanted to go that route. Not to mention this could indirectly cripple their cable partners, something they wouldn’t like when it is time to negotiate a new deal.And did he say that cable companies could serve 2/3 of their customers without Netflix? 33% of the internet is pretty powerful for just one site.

Someone go see if he is on TWC’s payroll.

Professor Falken • on Oct 4, 2013 1:34 pm

Virgin took Netflix on their MSO in the UK and it’s working out well.

Just give it time.. it’ll happen.

Professor Falken • on Oct 4, 2013 1:34 pm

oh whoops, just saw that bit at the bottom of the article.. Man the reporting here is great.

Jennifer • on Oct 4, 2013 1:34 pm

With ABC execs moving over to Amazon, you know something real is happening. Their first announced series don’t look too promising, but that will change when they staff up with real TV people instead of Internet people.